Marilyn Mohrman-Gillis, managing director of public policy at the Certified Financial Planner Board of Standards Inc., says her group and others are lobbying Congress to resist defining the fiduciary standard concept. "If you try to put it into a definitive definition in statute, it'll take away the flexibility to apply those principles on a case-by-case basis," she says. "You run the risk of diluting the standard and creating a 'fiduciary light' or 'suitability plus' type of standard."

Regulatory Gaps
Dale Brown, president and CEO of The Financial Services Institute (FSI), a trade group for independent broker-dealers, says he opposes applying the fiduciary standard to broker-dealers because it's not appropriate for that business model.
Instead, he says, a universal standard of care that works across all client situations and business models is the best way to improve regulation.

Brokers are governed by more rules than RIAs, entailing more reporting requirements. RIAs, on the other hand, follow the principles-based fiduciary standard that "has an eloquent definition and the requisite altruistic notion of consumer protection," says Matthew Bienfang, senior research director of brokerage and wealth management at the consulting firm the TowerGroup. "In practice, however, it is proving difficult to police."

The solution, at least according to TowerGroup, is a mix of rules-based and principles-based regulation for both brokers and advisors that would result in FINRA examiners conducting RIA audits, under the oversight of the SEC. FINRA currently performs a similar role, under SEC oversight, as the self-regulatory organization (SRO) for broker-dealers.

"What's the alternative [to FINRA audits of RIAs]?" asks Bienfang. "RIAs wish to have nothing happen at all, and that won't happen. The next most preferable outcome is to have their own SRO, and that also won't happen because none of them can pay for it."

The brokers' SRO, FINRA, gets its operating budget from its members. "Unless Congress [which sets the SEC's operating budget] is willing to fund an agency for governance and oversight of RIAs, it probably won't happen," Bienfang says.

The SEC regulates roughly 11,300 RIAs, or about 70% more than 10 years ago. In addition, the SEC oversees approximately 5,500 broker-dealers. The SEC acknowledges that, due to a lack of resources, it expects to examine only 9% of RIAs in both 2009 and 2010.

And that's prompting calls in some circles to create an SRO to help share the regulatory burden with the SEC. The oft-mentioned candidate is FINRA.

In a June speech, FINRA's Rick Ketchum cited the disparity between oversight regimes for broker-dealers and investment advisors as a regulatory gap that needs fixing. He said that FINRA is "uniquely positioned to build an oversight program that ensures investment advisors are properly examined and their customers are adequately protected." But he added that's for Congress and the SEC to decide.

In a May speech, SEC Commissioner Elisse Walter, who formerly worked at FINRA and one of its predessor organizations, the NASD, indicated she was on board with the concept of an outside SRO empowered with both enforcement and standard setting under SEC oversight. She noted that SROs traditionally are authorized to establish ethical and legal standards.

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